Thursday, October 6, 2016

Internalizing externalities in Solar Power

As the share of solar and renewable power, especially roof-top and other forms of captive generation, rises, one of the less discussed concerns revolves around its impact on the existing distribution utilities. Consider this story about the impact on the electricity distribution companies from the massive investments in solar and bargain hunting in power procurements by the large Las Vegas casinos,

While corporations are motivated to “go green,” their push to be more energy efficient leaves the utility with less revenue to maintain the grid and can lead to rate increases. This can cause what energy market observers call the “death spiral.” “If people are consuming less electricity, revenue for the company is going down, so they raise rates on others. That forces more of them to defect.” says Bill Ellard, an energy consultant and chair of economics for the American Solar Energy Society. “Soon, they won’t have enough money to keep gear, power lines, transmission stations working,” Ellard adds. “We have an old, ancient grid. A lot of power companies are just duct-taping and band-aiding things. Now monopolies like NV Energy are competing with free market innovation, and innovation is not their mantra. You don’t have to innovate when you’re a monopoly.” Meanwhile, corporations that have the wherewithal to move forward without the utility are doing so. This year, MGM expanded the solar array at Mandalay Bay Resort and Casino, making it one of the largest rooftop systems in the country. The 8.3 megawatt array can power the equivalent of 1,340 single-family homes, and can handle up to 25 percent of Mandalay Bay’s energy needs when fully active during the day...

While MGM and Wynn will buy their electricity from a brokerage, they still need to use NV Energy’s transmission lines and other equipment, and will remain customers of the utility in that regard... NV Energy, the state-regulated energy monopoly, has to serve a diverse group of energy users and makes plans on how to meet demand years in advance. Confronted with increased use of solar power as the systems become more affordable, the company has moved to stabilize revenue. Earlier this year, NV Energy decreased the amount it pays residential owners of solar arrays for excess electricity they send into the grid, causing a public outcry. Eventually existing solar users were grandfathered into the original rate.

There are three problems here. One, consumers who use renewables during sometime of the day and rely on grid power during peak hours pose grid management problems for the utility. Furthermore, they also sell power back to the grid. Two, there is an investment management problem that distribution companies face with planning their future investments in distribution and transmission networks. Then there are also the investments required to support the unknown amounts of potential sales into the grid. Three, the power tariffs, both consumption and sales back to the grid, do not reflect these externalities imposed in grid and investment management.

It is only a matter of time, as the scale of such transacted power rises, that the commercials of the current business models on roof-top solar and large-scale captive power become questionable. Give-aways like net metering will have to end and replaced with more tariffs that internalise the costs of fixed investments and grid management requirements.

But distribution utilities cannot afford to relax. This could change with another disruption, that in storage. If it becomes possible to store power at commercially viable price points, as looks likely to happen in the medium-term, then the bargaining power of the utility's consumers increase enormously.

Leaving aside all these details for a moment, an underlying subtle message that I draw from the churn that is happening in this market is that cost recovery in utility services essentially rests on cross-subsidy. The larger and richer consumers provide both the economies of scale and higher tariff increments that can support commercially viable network-wide distribution. In other words, cross-subsidy in inherent to universal supply of such services. So how will governments respond to this emerging scenario where the richer and larger consumers move away from utilities?